KillerApps Micro: Risk Taking
Better information on risky events may lead to market failure due to adverse selection.
Since people are risk-averse with respect to gain and risk-seeking with respect to loss, their choices can be easily manipulated by whether an offer is framed as a gain or a loss.
Health insurance premiums tend to be high for individual policies because of adverse selection and moral hazard.
Defined-contribution pension plans increase labor mobility and facilitate the revival of old businesses in the face of massive industrial restructuring and longer life expectancy.
Aversion to human betrayal may reduce potentially beneficial exchanges.
If the insured takes less care to prevent loss, the insurer might be subject to unanticipated loss because of such moral hazard.
Inner city stores attract immigrant owners who are risk takers and have lower opportunity costs of alternative employment.
Genetic test results on fatal diseases could lead to adverse selection of membership in life and health insurance if unfavorable results are concealed from insurers.
The Grameen Bank in Bangladesh uses joint liability as a screening device to overcome insufficient information on the soundness of individual loan projects and to circumvent the dangers of providing loans without collateral among the poor.
The insurance solution to risky behaviors, such as smoking and underage driving, is to raise premium to discourage such behaviors and not to subsidize the treatment of such behaviors.
The heated stock market for high-tech startups has spawned many newly rich through riskless stock options.
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